Assume that a provision of the Federal Tax Code permits a taxpayer to write off 75 percent of the first $10,000 in outlays for new capital equipment. However, if the taxpayer chooses to take the immediate write-off, the taxpayer loses the depreciation tax shield on the full $10,000.

Assume your company acquired $10,000 in new capital equipment and now must decide whether to take the immediate write-off or depreciate the asset over a fiveyear life as follows: Year 1, $1,200; Year 2, $2,500; Years 3-5, $2,100 per year. Your company has an after-tax cost of capital of 20 percent and a marginal tax rate of 40 percent.

Prepare an analysis to show the following items for each alternative:

a. Net present value.

b. Internal rate of return.

c. Payback period.

d. Optimal decision for the company.